Bear of the Day: Applied Optoelectronics (AAOI)

Optical networking equipment companies like Applied Optoelectronics (AAOI) are no stranger to the cellar of the Zacks Rank lately as a slowdown in Chinese datacenter demand and heated competition erode their sales and earnings power.

AAOI, in fact, has spent all of 2018 as a Zacks #5 Rank Strong Sell, since it was trading above $38 and fell to $22. And this week's earnings report gave analysts no reason to turn that trend around.

My colleague Ryan McQueeny wrote about the AAOI report on Tuesday and had this to say...

Currently, AAOI is a Zacks Rank #3 (Hold), but that could change based on today’s results. Shares of the company have gained about 38% over the past month, including a 4.4% gain during regular trading hours today.

The stock is currently down 9.3% to $32.00 per share in after-hours trading shortly after its earnings report was released.

Missed earnings estimates. The company posted adjusted earnings of $0.28 per share, missing the Zacks Consensus Estimate of $0.33 per share. Investors should note that this consensus projection has trended downward over the duration of the quarter.

Missed revenue estimates. The company saw revenue figures of $65.2 million, missing our consensus estimate of $69.3 million. Total revenue was down 32% from the year-ago period.

(end of excerpt from Ryan's article)

Three things stand out about Ryan's notes. First, he sure was right about the stock losing its #3 Rank after this earnings miss. It's rare to see analysts react so quickly, but the good news is that the Zacks Rank responded just as quickly, absorbing and calculating the new downward estimate revisions.

Second, estimates were indeed trending down into the company's quarterly report. Ryan's article included the graphic view of that decline, but I have run an update here. Below is Zacks proprietary Price & Consensus chart which plots changes in annual EPS estimates against the stock price...

Thirdly, the big reason that total revenue was down 32% year-over-year is that AAOI lost a good chunk of Amazon's business as their major and primary customer in the past year.

Investors looking to play trends in optical networking for the past year would have been consistently better off picking a big, diversified winner like Broadcom (AVGO) rather than dabbling in the smaller companies with greater sensitivity to a single customer, cut-throat competition and commodity pricing.

Until the earnings estimates stop going down and start heading back up, you'll be better off leaving this optical hardware player alone. The Zacks Rank will let you know.

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